SEC strengthens broker-dealer audit requirements

The SEC on Wednesday approved rule amendments that strengthen audit
requirements for broker-dealers.

The amendments are intended to increase protections for investors
whose money and securities are turned over to SEC-registered
broker-dealers. The final
rules are available on the SEC’s website.

Under previous rules, broker-dealers are required to file annual
reports with the SEC and the self-regulatory organization (SRO)
designated to examine that broker-dealer that contain financial
statements audited by a PCAOB-registered independent public
accountant. The new rule amendments require:

Broker-dealers that have custody of customers’ assets to file
a “compliance report” with the SEC to verify that they are complying
with broker-dealer capital requirements, protecting customer assets,
and sending periodic statements to customers.

Broker-dealers that do not have custody of customers’ assets to
file an “exemption report” with the SEC citing their exemption from
requirements for carrying broker-dealers.

In both cases, the broker-dealer is required to engage a
PCAOB-registered independent public accountant. The accountant would
prepare a report based on an examination of certain statements in the
compliance report, or a report based on a review of certain statements
in the exemption report, depending on whether the broker-dealer has
custody of customers’ assets.

The examination or review of the newly required reports—and the
examination of the broker-dealer’s financial statements—must be
conducted according to PCAOB standards. The accountant’s report based
on an examination of the compliance report will satisfy the annual
internal control audit report requirement for investment advisers.

Requiring reports under PCAOB standards is a significant change for
auditors because broker-dealer reports have been prepared under
generally accepted auditing standards (GAAS), according to Vince
Alvarez, CPA/CITP, an auditor with Breard & Associates in Los
Angeles. The firm is registered with the PCAOB, but Alvarez said firm
staff members will need training on PCAOB standards as a result of the
rule amendments.

“Just converting to PCAOB standards is going to be the toughest part
of this,” Alvarez said. “… It’s not a surprise. Anybody who has been
doing broker-dealer audits has seen this coming for the past couple of years.”

Broker-dealers registered with the Securities Investor Protection
Corporation (SIPC) also are required to file an annual report with the SIPC.

In addition, the amendments require a broker-dealer to file a new
quarterly Form Custody report containing information about whether and
how custody of customers’ securities and cash is maintained. The
objective of these reports is to establish a custody profile for
broker-dealers that can be used as a starting point by SEC and SRO
staff conducting routine inspections and examinations of broker-dealers.

The amendments also require broker-dealers to allow SEC or SRO staff
to review the work papers of the independent public accountant, if
requested in writing, for purposes of an examination of the
broker-dealer. Broker-dealers are required to allow the accountant to
discuss findings with the examiners. This amendment applies to
broker-dealers regardless of whether they have custody of their
clients’ assets.

The amendments regarding the Form Custody report and the requirement
to file annual reports with the SIPC take effect Dec. 31. The
effective date for the requirements relating to broker-dealer annual
reports is June 1, 2014.

“These rules will provide important additional safeguards for
customer assets held by broker-dealers,” SEC Chairman Mary Jo White
said in a news release.

The commission also amended financial
responsibility rules for broker-dealers. The net capital,
customer protection, books and records, and notification rules all
were changed with the intent of protecting broker-dealer customers and
strengthening the SEC’s monitoring ability.

The financial responsibility rule amendments take effect 60 days
after their publication in the Federal Register.

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